By Charlie Zhu and Judy Hua
HONG KONG/BEIJING, May 28 (Reuters) – Private investors with
the money and technology to unlock China’s vast pools of shale
and coal seam gas will need strong stomachs to brave the
unpredictable, unsupported and unregulated sector.
China, the world’s largest energy user, signalled last week
it wanted to draw more private investment into its energy sector
as part of a plan to fast-track infrastructure investment to
shore up economic growth.
It is drafting detailed guidelines to encourage private
investment across industries, with a special focus on heavily
state-controlled electricity, oil and natural gas, the official
Xinhua news agency reported.
Conventional oil, gas and coal production is highly
profitable in China but is dominated by state firms. Subsidies,
state monopolies and government control on energy prices have
made refining and power generation money-losing businesses.
Downstream segments such as gas storage, which produce
steady returns, is an area that could attract private money. Gas
distribution is another possibility because of strong earnings
prospects, but state firms are already muscling in. Arguably,
the sector in most need of new investment is unconventional
energy, such as shale gas, which could potentially curb China’s
reliance on foreign oil and gas.
Still, without detailed rules and incentives, China may find
few takers from the private sector in any area, let alone
unconventional energy.
“It is not sufficient to say the energy sector will be open
to private capital. The power generation industry has been open
to private enterprises for more than 20 years, but who would
have the guts to put money in the business?” said Lin Boqiang,
director of the China Centre of Energy Economics at Xiamen
University in southeast China.
“If China wants to make a material breakthrough in
attracting private capital, it has to come up with some
incentives to protect returns,” he said.
EMPTY PROMISE?
It is not the first time that senior policymakers have tried
to draw private capital to areas dominated by state firms.
Sources told Reuters last month that China’s reformers sensed an
opportunity to push through a series of changes before President
Hu Jintao and Premier Wen Jiabao step down early next year, so
that view could be behind the latest push.
State giants such as PetroChina
, Sinopec Corp and CNOOC
Ltd dominate the conventional oil-and-gas
sector from production, through refining, marketing and
pipelines.
PetroChina Chairman Jiang Jiemin told a media briefing last
week that private firms will be welcomed as investors in the
country’s third cross-country West-East gas pipeline, although
others say such a prospect is a difficult sell.
“It’s hard for private capital to participate in this giant
pipeline project because gas prices are controlled by the
government, the investment is huge and it usually takes more
than a decade to get the return,” said Xu Bo, a researcher with
China National Petroleum Corp, the parent of PetroChina.
Private investors may also be wary of the risk of
nationalisation. Beijing forced private owners to sell to the
government when it nationalised the oil industry in northern
Shaanxi in 2005 and the coal mining sector in Shanxi province in
2009. It set off protests that made international headlines.
SHALE CHALLENGE
China is examining interest in shale gas exploration, an
area with huge potential, but which is also a big challenge.
“Surprisingly, the first to show interest are those outside
our vision… Many are private companies,” Li Yuxi, researcher
at the strategic research centre of the Ministry of Land and
Resources, said in an industry conference last week.
The U.S. Energy Information Agency estimates China holds
36.1 trillion cubic metres (1,275 trillion cubic feet) of
technically recoverable shale gas reserves — significantly
higher than the 24.4 tcm (862 trillion cubic feet) in the United
States, which has the second-largest supply.
The National Energy Administration of China has targeted
production of 6.5 billion cubic metres (bcm) of shale gas by
2015, or roughly 6 percent of China’s current total gas
production. It aims to boost output to 60-100 bcm in 2020, a
level many experts say is over-ambitious given the
technological, environmental and geological challenges.
China has yet to build and lay all the pipelines needed to
transport shale gas, most of which is believed to be located in
mountainous areas or places far from markets, or to build
sufficient plants to process and store the gas.
“It seems to me that the government very badly
underestimates the time and the cost. In particular, they
underestimate the need to build … processing plants and
pipeline infrastructure,” said Al Troner, president of
Houston-based Asia Pacific Energy Consulting.
Added to which, without subsidies, tax breaks, and a
regulatory framework governing their interest in shale gas
discoveries, private investors may stay away, analysts say.
“You need to incentivise private investment and more
development of the oil service sector to improve efficiency and
develop technology to access and develop the shale gas,” said
Scott Darling, head of Asia Oil and Gas at Barclays Capital.
Without that, it may take some years before China develops
the shale gas sector at all.
Zhou Jiping, vice chairman of PetroChina, the country’s
dominant oil-and-gas producer, has said the state company will
prioritise tight gas and coal seam gas over shale gas because
the latter is more costly to extract.
“Shale gas is a long-term story for China. You are not going
to see much progress in the next five years,” said a source
close to PetroChina’s shale gas strategy, who asked not to be
identified because he was not authorised to speak to the public.
